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September 19, 2011

Roubini, PIMCO’s El-Erian: Kick Out Greece to Save Euro

Cutting weaker nations would put joint currency on firmer footing

PIMCO CEO Mohamed El-Erian. (Photo: AP)

Two of the most followed financial leaders on Monday called for Greece to abandon the euro to save the eurozone.

Both Mohamed El-Erian of PIMCO and Nouriel Roubini, a leading economic strategist, suggested the move was the only way forward.

El-Erian, CEO and co-CIO of PIMCO, says an exit from the joint currency bloc for Greece and possibly one or two other countries (likely Portugal and Ireland, though he does not specify) will make for a stronger eurozone with a currency better able to resist "policy mistakes and market accidents."

Roubini, co-founder and chairman of Roubini Global Economics, says that Greece must default on its debts and leave the eurozone in order to escape its current disastrous economy and "rip-off" debt exchange deal.

El-Erian advocates saving the euro, via the departure of peripheral, bailed-out nations—one of only two courses of action open to the 17-nation bloc. In an opinion piece originally appearing Saturday in the German business newspaper Handelsblatt and reported by the Huffington Post, El-Erian said the euro was not only "central to Europe's economic prosperity, financial stability and political harmony," but "critical to placing an increasingly multi-polar world economy back on the path of high growth and job creation." To that end, he said, Europe must make some hard decisions concerning both structures and institutions, and its approach must change.

Calling upon Germany, France, Austria, Finland and the Netherlands to decide on just what they envision for European integration, he said that the status quo was no longer acceptable and that neither choice available to them is easy: either maintaining the eurozone at its current size, or reducing it to a smaller and stronger entity.

While both options are expensive and controversial, he added, with the strong possibility of "collateral damage and unintended consequences," he pointed out that the first choice, of keeping the eurozone intact, depends on a number of factors, one of which is the willingness of stronger economies to shore up weaker ones—but they cannot help them grow their economies; the weaker countries themselves must work to do that, a task that is growing less likely as their citizens are increasingly subject to austerity fatigue and the perception that they are being forced into austerity by richer neighbors.

The alternative is to give weaker countries a "sabbatical" from the euro—another highly risky strategy that could, however, result in a stronger Europe. The decision, he concluded, must be made quickly, because "[t]here is little time to waste."

Roubini, on the other hand, approached the matter from Greece’s point of view and said that the only way Athens can extricate itself from "a vicious cycle of insolvency, low competitiveness and ever-deepening depression" is to leave the euro behind, default on its massive debt and return to the drachma.

In a Monday blog, Roubini wrote that the only feasible way to return to growth within a reasonable amount of time is for Greece to abandon the euro and devalue the drachma. That strategy would lead to losses for core eurozone financial institutions, he acknowledged, but those problems could be overcome—and no other option exists that would allow Greece to return to reasonable economic health within a period of time endurable by its citizens than an orderly default and devaluation.

Pointing to Argentina as an example of how such a strategy might be managed, and urging rapid recapitalization of eurozone banks to avoid disaster from other debt-ridden member countries, he compared it to a painful and costly divorce, but said that "watching the slow disorderly implosion of the Greek economy and society will be much worse."

Markets were not happy with the news, or with the continuing saga of eurozone debt woes. All Asian and European markets with the exception of the Nikkei, which was closed for a holiday, were down substantially; the FTSE and DAX both closed down more than 2%, and the CAC lost 3%. U.S. markets followed, with the Dow down 1.63% in afternoon trading and looking set to close lower.